StudyOSStudyOS CBSE Study Material, Class 5–12

Reconstitution of a Partnership Firm – Admission of a Partner

NCERT Class 12 · Accountancy Based on NCERT Class 12 Accountancy textbook · Free CBSE study kit

Everything you need to ace this chapter, in one place.
Notes · Mind Map · Quiz · Assertion-Reason · Case Studies · Question Bank · Past Papers

Get Full Study Kit →
Studying with friends? Send them this chapter.

Chapter Notes

Overview
This chapter introduces the concept of reconstitution of a partnership firm, focusing on the admission of a new partner and changes in profit-sharing ratios among existing partners. It explains the accounting adjustments required during such events, including the calculation of new profit-sharing and sacrificing ratios, valuation and treatment of goodwill, revaluation of assets and liabilities, and distribution of accumulated profits. The one big idea a student must walk away with is that any change in the partnership agreement leads to reconstitution, requiring systematic adjustments to ensure fairness among all partners.
Key Concepts (13)
Reconstitution of a partnership firm
Any change in the existing agreement of a partnership firm, resulting in an end of the existing agreement and a new agreement coming into being with a changed relationship among the members or their composition, while the firm continues.
e.g. Admission of a new partner, change in profit sharing ratio, retirement, death, or insolvency of a partner.
Admission of a new partner
A new partner is admitted when the firm needs additional capital or managerial help, and according to the Partnership Act 1932, a new partner can be admitted only with the consent of all existing partners unless otherwise agreed.
e.g. Hari and Haqque (3:2) admit John with 1/6 share; the firm is reconstituted with three partners.
New profit sharing ratio
The ratio in which all partners (including the new partner) will share future profits after the admission of a new partner or change in existing ratio.
e.g. Anil and Vishal (3:2) admit Sumit for 1/5 share; new ratio is 12:8:5.
Sacrificing ratio
The ratio in which the old partners agree to sacrifice their share of profit in favour of the incoming partner, calculated as Old Share of Profit – New Share of Profit.
e.g. Rohit and Mohit (5:3) admit Bijoy for 1/7 share; new ratio 4:2:1; sacrificing ratio is 3:5.
Goodwill
An intangible asset representing the monetary value of the reputation of a firm in respect of the profits expected in future over and above the normal profits; it is the present value of a firm's anticipated excess earnings.
e.g. A well-established business with high customer loyalty has high goodwill.
Super profits
The excess of actual profits over normal profits, calculated as Average Profit – Normal Profit.
e.g. If average profit is Rs. 60,000 and normal profit is Rs. 50,000, super profit is Rs. 10,000.
Normal profit
Profit that a firm is expected to earn under normal circumstances, calculated as Firm's Capital × Normal Rate of Return / 100.
e.g. Capital Rs. 5,00,000, normal rate 10%, normal profit = Rs. 50,000.
Capital employed
Total assets (excluding goodwill and fictitious assets) minus outside liabilities (long-term and short-term).
e.g. Total assets Rs. 10,00,000, outside liabilities Rs. 2,00,000, capital employed = Rs. 8,00,000.
Premium for goodwill
Additional amount brought in by the new partner to compensate the sacrificing partners for loss of their share in super profits.
e.g. New partner brings Rs. 4,000 as premium for goodwill, shared by old partners in sacrificing ratio.
Revaluation of assets and reassessment of liabilities
Adjustment made at the time of admission of a partner to reflect the current market value of assets and liabilities, with profit or loss transferred to old partners' capital accounts in their old profit sharing ratio.
e.g. Increase in value of land is credited to Revaluation Account, then distributed to old partners.
Accumulated profits and losses
Reserves, undistributed profits, or losses appearing in the balance sheet of the old firm, which are transferred to old partners' capital accounts in their old profit sharing ratio at the time of admission.
e.g. General reserve of Rs. 20,000 is credited to old partners' capital accounts in old ratio.
Hidden goodwill
When the value of goodwill is not explicitly given but is inferred from the arrangement of capital and profit-sharing ratio at the time of admission.
e.g. If a new partner brings capital for a share and the total capital of the firm is implied, goodwill is calculated as the difference.
Accounting Standard 26 (AS 26)
Standard for intangible assets stating that internally generated goodwill should not be recognised as an asset, and purchased goodwill should be written off over a period not exceeding 10 years.
e.g. Goodwill appearing in books is written off at the time of admission of a new partner.
Formulas & Equations (10)
Sacrifice = Old Share of Profit – New Share of Profit
Reads as: Sacrifice equals old share of profit minus new share of profit
Variables: Old Share of Profit: fraction of profit before change; New Share of Profit: fraction after change
Use when: Calculating sacrificing ratio when new profit sharing ratio is given but sacrificing ratio is not directly provided
⚠ Students often subtract old share from new share instead of new from old, leading to negative sacrifice.
Average Profit = Total Profit of Last N Years / Number of Years
Reads as: Average profit equals total profit of last N years divided by number of years
Variables: Total Profit: sum of profits for given years (Rs.); Number of Years: count of years
Use when: Valuing goodwill under Average Profits Method
⚠ Including loss years incorrectly or not adjusting for abnormal items.
Goodwill = Average Profits × Number of Years' Purchase
Reads as: Goodwill equals average profits multiplied by number of years purchase
Variables: Average Profits (Rs.); Number of Years' Purchase: agreed multiplier
Use when: Valuing goodwill under Average Profits Method
⚠ Using weighted average without being instructed, or forgetting to adjust for abnormal profits/losses.
Weighted Average Profit = Sum of (Profit × Weight) / Sum of Weights
Reads as: Weighted average profit equals sum of profit times weight divided by sum of weights
Variables: Profit (Rs.); Weight: assigned to each year (e.g., 1,2,3,4,5)
Use when: Valuing goodwill when there is an increasing or decreasing trend in profits and weights are specified
⚠ Using simple average instead of weighted average when weights are given.
Normal Profit = (Firm's Capital × Normal Rate of Return) / 100
Reads as: Normal profit equals firm's capital multiplied by normal rate of return divided by 100
Variables: Firm's Capital (Rs.): includes partners' capital and reserves, excludes goodwill and fictitious assets; Normal Rate of Return (%): expected return in similar business
Use when: Calculating super profits for goodwill valuation under Super Profits Method
⚠ Including goodwill or fictitious assets in firm's capital, or using incorrect normal rate.
Super Profit = Average Profit – Normal Profit
Reads as: Super profit equals average profit minus normal profit
Variables: Average Profit (Rs.); Normal Profit (Rs.)
Use when: Valuing goodwill under Super Profits Method
⚠ Subtracting average profit from normal profit, giving negative super profit.
Goodwill = Super Profit × Number of Years' Purchase
Reads as: Goodwill equals super profit multiplied by number of years purchase
Variables: Super Profit (Rs.); Number of Years' Purchase: agreed multiplier
Use when: Valuing goodwill under Super Profits Method
⚠ Using average profit instead of super profit in multiplication.
Capitalised Value of Average Profits = Average Profits × (100 / Normal Rate of Return)
Reads as: Capitalised value of average profits equals average profits multiplied by 100 divided by normal rate of return
Variables: Average Profits (Rs.); Normal Rate of Return (%)
Use when: Valuing goodwill under Capitalisation of Average Profits Method
⚠ Forgetting to deduct net assets from capitalised value to get goodwill.
Goodwill = Capitalised Value of Average Profits – Net Assets
Reads as: Goodwill equals capitalised value of average profits minus net assets
Variables: Capitalised Value (Rs.); Net Assets = Total Assets (excluding goodwill and fictitious assets) – Outside Liabilities (Rs.)
Use when: Valuing goodwill under Capitalisation of Average Profits Method
⚠ Using total assets without deducting outside liabilities, or including goodwill in net assets.
Goodwill = Super Profit × (100 / Normal Rate of Return)
Reads as: Goodwill equals super profit multiplied by 100 divided by normal rate of return
Variables: Super Profit (Rs.); Normal Rate of Return (%)
Use when: Valuing goodwill under Capitalisation of Super Profits Method
⚠ Using average profit instead of super profit, or forgetting to multiply by 100.
How It Works
Calculation of New Profit Sharing Ratio when new partner acquires share from old partners in their old ratio
  1. Step 1: Determine the share of the new partner (e.g., 1/5).
  2. Step 2: Calculate the remaining share: 1 – new partner's share.
  3. Step 3: Distribute the remaining share among old partners in their old profit sharing ratio.
  4. Step 4: Express each partner's share as a fraction with a common denominator to get the new ratio.
💡 If nothing is specified, assume the new partner acquires his share from old partners in their old profit sharing ratio.
Calculation of New Profit Sharing Ratio when new partner acquires share from old partners in a specified manner
  1. Step 1: Note the share of the new partner and how it is acquired from each old partner (e.g., equally, or specific fractions).
  2. Step 2: Subtract the surrendered share from each old partner's old share to get their new share.
  3. Step 3: Write the new shares as a ratio.
💡 Always check if the new partner's share is acquired wholly from one partner or from multiple partners in a given proportion.
Calculation of Sacrificing Ratio when new profit sharing ratio is given
  1. Step 1: Write each old partner's old share.
  2. Step 2: Write each old partner's new share from the given new ratio.
  3. Step 3: Calculate sacrifice for each old partner: Old Share – New Share.
  4. Step 4: Express the sacrifices as a ratio.
💡 Sacrificing ratio is used to distribute the goodwill brought by the new partner. If a partner's new share is greater than old share, it is a gain, not sacrifice.
Valuation of Goodwill under Average Profits Method
  1. Step 1: Calculate total profits for the given number of past years (adjust for abnormal items if any).
  2. Step 2: Compute average profit = Total Profit / Number of Years.
  3. Step 3: Multiply average profit by the agreed number of years' purchase to get goodwill.
💡 If weights are given, use weighted average instead of simple average. Adjust for any non-recurring items or errors in profits.
Valuation of Goodwill under Super Profits Method
  1. Step 1: Calculate average profit (as in average profits method).
  2. Step 2: Calculate normal profit = (Firm's Capital × Normal Rate of Return) / 100.
  3. Step 3: Compute super profit = Average Profit – Normal Profit.
  4. Step 4: Multiply super profit by the number of years' purchase to get goodwill.
💡 Firm's capital includes partners' capital and reserves, but excludes goodwill and fictitious assets. Normal rate of return is the expected return in similar businesses.
Valuation of Goodwill under Capitalisation of Average Profits Method
  1. Step 1: Calculate average profit.
  2. Step 2: Capitalise average profit: Capitalised Value = Average Profit × (100 / Normal Rate of Return).
  3. Step 3: Calculate net assets = Total Assets (excluding goodwill and fictitious assets) – Outside Liabilities.
  4. Step 4: Goodwill = Capitalised Value – Net Assets.
💡 If capitalised value is less than net assets, goodwill is negative (badwill), but in practice, goodwill is recorded only if positive.
Valuation of Goodwill under Capitalisation of Super Profits Method
  1. Step 1: Calculate super profit (as in super profits method).
  2. Step 2: Goodwill = Super Profit × (100 / Normal Rate of Return).
💡 This method gives the same result as capitalisation of average profits method if net assets are correctly computed.
Treatment of Goodwill when new partner brings premium in cash
  1. Step 1: Record bank entry: Bank A/c Dr. To New Partner's Capital A/c (for capital) and To Premium for Goodwill A/c (for goodwill).
  2. Step 2: Distribute premium: Premium for Goodwill A/c Dr. To Sacrificing Partners' Capital A/cs (individually) in sacrificing ratio.
  3. Step 3: If partners withdraw goodwill: Debit their capital accounts and credit bank.
💡 If the amount is paid privately, no entry is passed in the books. The sacrificing ratio is used, not the old ratio.
Treatment of Goodwill when new partner does not bring goodwill in cash
  1. Step 1: If no goodwill exists in books: Debit New Partner's Current A/c and credit Sacrificing Partners' Capital A/cs in sacrificing ratio.
  2. Step 2: If goodwill exists in books: First write off existing goodwill by debiting old partners' capital accounts in old ratio and crediting Goodwill A/c. Then, for new goodwill, debit New Partner's Current A/c and credit Sacrificing Partners' Capital A/cs.
💡 The new partner's current account is debited because the amount is receivable from him. This does not affect the cash balance.
Writing off existing goodwill at the time of admission
  1. Step 1: Determine the existing goodwill amount in the books.
  2. Step 2: Debit old partners' capital accounts in their old profit sharing ratio.
  3. Step 3: Credit Goodwill A/c with the same amount.
💡 This is done to remove the old goodwill before recording the new valuation, as per AS 26.
Exam Traps — Don't Make These Mistakes
⚠ Confusing sacrificing ratio with old profit sharing ratio
✗ Goodwill brought by new partner is distributed in the old profit sharing ratio (e.g., 3:2).
→ Goodwill is compensation for the share sacrificed, so it must be distributed in the sacrificing ratio, which may differ from the old ratio if the new partner acquires share in a different proportion.
✓ Goodwill brought by the new partner is distributed among the existing partners in their sacrificing ratio, calculated as Old Share – New Share.
⚠ Using new profit sharing ratio to calculate sacrifice when new partner's share is given directly
✗ If new partner gets 1/5 share, old partners' new shares are calculated by dividing the remaining 4/5 in old ratio, but then sacrifice is calculated as old share minus new share incorrectly.
→ When the new partner's share is given directly, the remaining share is indeed divided in old ratio, but the sacrifice is already implied. Students often double-calculate or use wrong fractions.
✓ First calculate new shares correctly: new partner's share = 1/5, remaining = 4/5, old partners get 4/5 in old ratio. Then sacrifice = old share – new share. Alternatively, if new partner acquires from old partners in a specified manner, use that directly.
⚠ Forgetting to adjust for abnormal items in profit calculation
✗ Using given profits directly without adjusting for items like major repairs charged to revenue, overvaluation of stock, or management costs.
→ Goodwill valuation should be based on normal, sustainable profits. Abnormal items distort the true earning capacity.
✓ Adjust profits by adding back non-recurring expenses (e.g., capital expenditure charged to revenue), deducting non-recurring incomes, correcting stock valuation errors, and deducting management costs if not already accounted.
⚠ Including goodwill or fictitious assets in capital employed for normal profit calculation
✗ Firm's capital = Total Assets (including goodwill) – Outside Liabilities.
→ Goodwill and fictitious assets are not part of the capital employed that generates normal profits; they are themselves intangible assets or losses.
✓ Firm's capital = Total Assets (excluding goodwill and fictitious assets) – Outside Liabilities.
⚠ Treating hidden goodwill incorrectly
✗ When goodwill is not given, students assume no goodwill adjustment is needed.
→ Hidden goodwill can be inferred from the capital brought by the new partner and the implied total capital of the firm based on profit-sharing ratio.
✓ Calculate implied total capital: New partner's capital × (1 / new partner's share). Then hidden goodwill = Implied total capital – Actual total capital (old partners' capital + new partner's capital). Adjust accordingly.
⚠ Not writing off existing goodwill before recording new goodwill
✗ Directly credit new partner's current account and debit sacrificing partners' capital accounts without writing off the old goodwill.
→ AS 26 requires that internally generated goodwill not be shown as an asset. Existing goodwill in books must be written off before recording the new valuation to avoid double counting.
✓ First write off existing goodwill by debiting old partners' capital accounts in old ratio and crediting Goodwill A/c. Then record the new goodwill adjustment.
Compare & Contrast
Purpose
New Profit Sharing Ratio
Sacrificing Ratio
New profit sharing ratio determines how future profits will be shared among all partners after admission; sacrificing ratio determines how the old partners' sacrifice (and thus the goodwill premium) is distributed among them.
Basis of valuation
Average Profits Method
Super Profits Method
Average profits method values goodwill based on total average profits multiplied by years' purchase; super profits method values goodwill based on excess of average profits over normal profits (super profits) multiplied by years' purchase.
Calculation approach
Capitalisation of Average Profits Method
Capitalisation of Super Profits Method
Capitalisation of average profits method calculates goodwill as the difference between capitalised value of average profits and net assets; capitalisation of super profits method directly capitalises super profits (Super Profit × 100/Normal Rate of Return) to get goodwill.
Exam Focus
Marks pattern: 1 MCQ (1 mark) on ratio or goodwill concept, 1 SA (3 marks) on calculation of sacrificing ratio or goodwill valuation, 1 LA (5-6 marks) on comprehensive problem involving admission of a partner including goodwill, revaluation, and capital adjustment
Most asked: Calculation of new profit sharing ratio and sacrificing ratio · Valuation of goodwill using average profits, super profits, and capitalisation methods · Journal entries for treatment of goodwill (premium brought in cash, not brought in cash, hidden goodwill) · Adjustments for revaluation of assets and reassessment of liabilities · Distribution of accumulated profits and reserves
Don't skip: Comprehensive problem on admission of a partner requiring calculation of new ratio, sacrificing ratio, goodwill treatment, revaluation account, and partners' capital accounts; Valuation of goodwill with adjustments for abnormal items and weighted average
One-Line Revision (read aloud before the exam)
  1. Reconstitution of a partnership firm occurs through admission, retirement, death, change in profit sharing ratio, or insolvency of a partner.
  2. A new partner can be admitted only with the consent of all existing partners unless otherwise agreed in the partnership deed.
  3. New profit sharing ratio is the ratio in which all partners will share future profits after admission.
  4. Sacrificing ratio is calculated as Old Share of Profit minus New Share of Profit.
  5. Goodwill is an intangible asset representing the present value of a firm's anticipated excess earnings.
  6. Under average profits method, goodwill = average profits × number of years' purchase.
  7. Under super profits method, goodwill = super profits × number of years' purchase, where super profit = average profit – normal profit.
  8. Normal profit = (Firm's capital × normal rate of return) / 100, where firm's capital excludes goodwill and fictitious assets.
  9. Under capitalisation method, goodwill = capitalised value of average profits – net assets, or goodwill = super profit × (100 / normal rate of return).
  10. When a new partner brings premium for goodwill in cash, it is distributed to sacrificing partners in their sacrificing ratio.
  11. If the new partner does not bring goodwill in cash, his current account is debited and sacrificing partners' capital accounts are credited.
  12. Existing goodwill in the books must be written off at the time of admission by debiting old partners' capital accounts in their old ratio.
  13. Hidden goodwill is inferred when the value of goodwill is not given but can be calculated from the capital brought by the new partner and the profit-sharing arrangement.
  14. Revaluation of assets and reassessment of liabilities are recorded through a Revaluation Account, with profit or loss transferred to old partners' capital accounts.
  15. Accumulated profits and losses (reserves) are transferred to old partners' capital accounts in their old profit sharing ratio at the time of admission.

MCQs — 10 Questions with Answers

Q1. Pavan and Qadir are partners sharing profits in ratio 3:2. They admit Rishi for 1/5 share. What is the sacrificing ratio?

  • A. 3:2 ✓
  • B. 3:1
  • C. 2:1
  • D. 1:1

Answer: A — New partner gets 1/5, so old partners retain 4/5 in their old ratio 3:2 (Pavan 3/5 × 4/5 = 12/25, Qadir 2/5 × 4/5 = 8/25); sacrificing ratio = old ratio 3:2 since both sacrifice equally.

Q2. Which account is debited when a new partner brings goodwill in cash?

  • A. Partner's Capital Account
  • B. Goodwill Account ✓
  • C. Revaluation Account
  • D. Partner's Current Account

Answer: B — When goodwill is brought in cash by the new partner, Goodwill Account is debited and Cash/Bank is credited; this records goodwill as an asset.

Q3. Amit and Brijesh are partners with capitals of ₹50,000 and ₹40,000. They admit Chitra for 1/4 share in profits. If Chitra contributes ₹35,000, what is the total capital of the firm after admission?

  • A. ₹125,000
  • B. ₹140,000 ✓
  • C. ₹105,000
  • D. ₹175,000

Answer: B — Chitra's share is 1/4, so her capital ₹35,000 = 1/4 of total capital; Total capital = ₹35,000 × 4 = ₹140,000.

Q4. In the Capitalisation Method of goodwill valuation, if Normal Rate of Return is 10% and Average Profit is ₹40,000, what is the implied firm value?

  • A. ₹4,000
  • B. ₹4,00,000 ✓
  • C. ₹40,000
  • D. ₹10,000

Answer: B — Capital Employed = Average Profit ÷ Normal Rate of Return = ₹40,000 ÷ 10% = ₹4,00,000; this is the capitalised value of profits.

Q5. Which of the following is NOT a reason for reconstitution of a partnership firm?

  • A. Admission of a new partner
  • B. Change in profit sharing ratio
  • C. Death of a partner
  • D. Increase in annual sales revenue ✓

Answer: D — Reconstitution occurs only when the partnership agreement changes (admission, retirement, death, ratio change), not merely due to business growth or sales increase.

Q6. In which ratio are accumulated profits distributed when a new partner is admitted?

  • A. New profit sharing ratio
  • B. Old profit sharing ratio ✓
  • C. Equally among all partners
  • D. Sacrificing ratio

Answer: B — Accumulated profits were earned under the old agreement, so they belong to old partners in their old ratio; they are distributed/credited to old partners only.

Q7. Assertion: Goodwill is a tangible asset of the firm. Reason: Goodwill represents the excess earning capacity of the firm.

  • A. Both assertion and reason are correct; reason is the correct explanation
  • B. Both assertion and reason are correct; reason is NOT the correct explanation
  • C. Assertion is correct; reason is incorrect
  • D. Assertion is incorrect; reason is correct ✓

Answer: D — Goodwill is an intangible asset (not tangible), but the reason is correct—goodwill represents the firm's excess earning capacity above normal returns.

Q8. If old partners' capital accounts show: A = ₹60,000 (3/5 share), B = ₹40,000 (2/5 share), and C is admitted for 1/5 share bringing ₹30,000 capital, what should be total capital of the firm after all adjustments (assuming no revaluation)?

  • A. ₹1,50,000 ✓
  • B. ₹1,20,000
  • C. ₹1,30,000
  • D. ₹1,00,000

Answer: A — C's capital ₹30,000 = 1/5 of total; Total = ₹30,000 × 5 = ₹1,50,000; A and B's capitals remain ₹60,000 and ₹40,000; C's is ₹30,000; total = ₹1,50,000.

Q9. Which method of goodwill valuation uses the formula: Goodwill = Super Profit × Years' Purchase?

  • A. Average Profit Method
  • B. Super Profit Method ✓
  • C. Capitalisation Method
  • D. Standard Profit Method

Answer: B — Super Profit Method explicitly calculates Super Profit (Average Profit − Normal Profit) and then multiplies by Years' Purchase to derive goodwill.

Q10. Revaluation gains/losses on assets are credited to old partners in which ratio, and why?

  • A. New ratio; because they will own the assets under the new agreement
  • B. Old ratio; because these gains belong to partners who were responsible for past management ✓
  • C. Sacrificing ratio; because sacrificing partners deserve compensation
  • D. Equally; to maintain fairness among all partners

Answer: B — Revaluation gains/losses relate to assets under the old agreement, so they belong to old partners only in their old ratio; these are pre-reconstitution gains/losses.

Flashcards

What is reconstitution of a partnership firm?

Any change in the existing partnership agreement (admission, retirement, death, or change in profit ratio) that ends the old agreement and creates a new one, though the firm continues.

Define sacrificing ratio.

The ratio in which old partners lose their profit share to the new partner, calculated as Old Ratio minus New Ratio for each partner.

Why must a new partner pay goodwill or premium?

To compensate existing partners for the loss of their share in the firm's super profits (profits earned above the normal rate of return on capital).

What is the formula for Super Profit method of goodwill valuation?

Super Profit = Average Profit − Normal Profit; Goodwill = Super Profit × Years' Purchase.

Which account is credited when goodwill is brought in cash by the new partner?

Goodwill account is debited and Cash/Bank account is credited.

In which ratio are accumulated profits distributed among partners at admission?

In the old profit sharing ratio, because these profits were earned under the old agreement.

What is the purpose of a Revaluation Account?

To record changes in the values of assets and liabilities at the time of reconstitution, with gains/losses distributed in the old ratio.

What is the formula: New Profit Sharing Ratio = ?

New Profit Sharing Ratio is determined by how the incoming partner acquires their share from old partners—either in their old ratio or as specified in the partnership deed.

When is a partner's capital adjusted after admission?

After all adjustments (revaluation, goodwill, reserves distribution), each partner's capital is adjusted to equal their proportionate share of the total capital as per the new ratio.

What is the key difference between hidden goodwill and goodwill brought in kind?

Hidden goodwill is calculated but not recorded as an asset; goodwill brought in kind is the new partner's cash contribution that reflects an agreed goodwill value.

Important Board Questions

Define goodwill and state three factors that affect its value. [2 marks]

Goodwill = intangible asset reflecting excess earning capacity. Factors: reputation, customer loyalty, profit trend, location, business stability. State definition + list any 3 factors briefly.

Rama and Sita are partners sharing profits in ratio 5:3. They admit Tara as a new partner for 1/4 share in future profits, which she acquires 1/6 from Rama and 1/12 from Sita. Calculate the new profit sharing ratio of Rama, Sita, and Tara. Also calculate the sacrificing ratio. [5 marks]

Step 1: Rama's new share = 5/8 − 1/6 (convert to common denominator); Sita's new share = 3/8 − 1/12; Tara's = 1/4. Step 2: Sacrificing Ratio = Old Ratio − New Ratio for each partner. Convert all fractions to common denominator (24) and simplify.

Explain the difference between the four methods of treating goodwill when a new partner is admitted. Give a journal entry for each case, assuming old partners A and B (ratio 2:1) admit C for 1/4 share, and goodwill is valued at ₹40,000. [6 marks]

C's share of goodwill = 1/4 × ₹40,000 = ₹10,000; sacrificing ratio = old ratio 2:1 (A ₹6,667, B ₹3,333). All four cases start the same way: Bank A/c Dr 10,000 / To Premium for Goodwill A/c 10,000; then Premium for Goodwill A/c Dr 10,000 / To A's Capital A/c 6,667 / To B's Capital A/c 3,333. Case 1 (retained in business): no further entry. Case 2 (fully withdrawn by old partners): A's Capital A/c Dr 6,667 / B's Capital A/c Dr 3,333 / To Bank A/c 10,000. Case 3 (50% withdrawn): A's Capital A/c Dr 3,333 / B's Capital A/c Dr 1,667 / To Bank A/c 5,000. Case 4 (C brings no cash for goodwill — hidden goodwill): C's Current A/c Dr 10,000 / To A's Capital A/c 6,667 / To B's Capital A/c 3,333 (no Bank/Cash entry at all, since nothing is received in cash). Note only Cases 1–3 involve a Bank/Cash entry because C actually pays the premium in cash there; Case 4 is a pure capital/current account adjustment with no cash movement.

Assertion-Reason Questions for Reconstitution of a Partnership Firm – Admission of a Partner

Q1. Assertion (A):

Upon admission of a new partner, the sacrificing partners' profit shares decrease in the partnership firm.

Reason (R):

The new partner acquires a portion of profits from the existing partners, which reduces their share in the firm's future earnings.

Answer: A — Both A and R are true, and R is the correct explanation of A — Both statements are true and logically connected. The new partner's entry necessarily reduces existing partners' profit shares, and this is exactly why they are called 'sacrificing' partners. The reason directly explains the assertion.

Q2. Assertion (A):

Goodwill must always be recorded in the books of accounts when a new partner is admitted with a capital contribution.

Reason (R):

Recording goodwill ensures that all partnership assets are fully represented in the Balance Sheet.

Answer: D — A is false but R is true — The assertion is false because goodwill is recorded only when it is paid (visible goodwill), not in all cases. Hidden goodwill is deliberately not recorded in books. The reason is also irrelevant, as goodwill's purpose is to compensate sacrificing partners, not merely to list assets.

Q3. Assertion (A):

Accumulated profits of the partnership firm prior to admission of a new partner are distributed to old partners only.

Reason (R):

Accumulated profits belong exclusively to old partners because they were earned during the period of old partnership when the new partner was not part of the firm.

Answer: A — Both A and R are true, and R is the correct explanation of A — Both statements are true and the reason correctly explains why accumulated profits go only to old partners. The new partner has no claim on pre-admission earnings; they share only future profits according to the new profit sharing ratio.

Unlock more Assertion-Reason questions in Premium — unlock →

Case-Based Questions (CBQ) for Reconstitution of a Partnership Firm – Admission of a Partner

Case Study:

Amit and Bhavna started a partnership firm on 1st October 2024 with capitals of ₹5,00,000 and ₹3,00,000 respectively. According to the partnership deed, Bhavna is entitled to a monthly salary of ₹8,000 and interest on capital is to be allowed at 6% per annum. The profit for the year ended 30th September 2025 was ₹2,40,000 before any appropriations.

Q1. What is the total interest on capital credited to Amit's capital account for the year ended 30th September 2025?

  • A. ₹30,000 ✓
  • B. ₹15,000
  • C. ₹18,000
  • D. ₹20,000

Answer: A

Q2. What is the total amount of salary credited to Bhavna's capital account for the year?

  • A. ₹96,000 ✓
  • B. ₹48,000
  • C. ₹72,000
  • D. ₹1,00,000

Answer: A

Q3. After charging interest on capital and Bhavna's salary, the remaining profit is ₹84,000. If the partners share profits equally, what amount will be credited to Amit's capital account as his share of profit?

  • A. ₹84,000
  • B. ₹42,000 ✓
  • C. ₹72,000
  • D. ₹21,000

Answer: B

Q4. If the partnership deed was silent on interest on capital and salary, how would the entire profit of ₹2,40,000 be distributed between Amit and Bhavna?

  • A. Equally as per the Partnership Act, 1932
  • B. In the ratio of their capitals, i.e., 5:3 ✓
  • C. Amit gets ₹1,44,000 and Bhavna gets ₹96,000
  • D. No distribution until a deed is made

Answer: B

Unlock more case studies in Premium — unlock →

Previous Year Questions (PYQ) for Reconstitution of a Partnership Firm – Admission of a Partner

Real CBSE board exam questions from past papers — free to attempt.

CBSE 2026 · Set 67/3/1 · 1 mark

Chaman, Raman and Suman were partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. With effect from 1st April, 2025, they decided to share the future profits in the ratio of 2 : 3 : 5. For this purpose, it was agreed that the goodwill of the firm be valued at ₹1,00,000. The treatment of goodwill without opening goodwill account will be:

  • Debit Chaman's Capital A/c by ₹30,000
  • Credit Chaman's Capital A/c by ₹30,000
  • Debit Chaman's Capital A/c ₹15,000 Credit Suman's Capital A/c ₹30,000
  • Debit Chaman's Capital A/c ₹30,000 Credit Suman's Capital A/c ₹15,000

CBSE 2026 · Set 67/3/1 · 1 mark

Anup, Bharti and Manoj were partners in a firm sharing profits and losses in the ratio of 11 : 8 : 1. From 1st April, 2025, they decided to share the future profits in the ratio of 2 : 2 : 1. The gain or sacrifice of each partner due to change in profit sharing ratio will be:

  • Anup gain 30/60, Bharti sacrifice 18/60, Manoj sacrifice 12/60
  • Anup sacrifice 30/60, Bharti gain 18/60, Manoj gain 12/60
  • Anup gain 18/60, Bharti sacrifice 30/60, Manoj sacrifice 12/60
  • Anup sacrifice 18/60, Bharti gain 30/60, Manoj gain 12/60

CBSE 2026 · Set 67/3/1 · 3 marks

Dhruv and Seema were partners in a firm sharing profits and losses in the ratio of 2 : 3. Their capitals were ₹18,00,000 and ₹12,00,000 respectively. The normal rate of return was 15%. The profits of the last four years were: ₹7,75,000, ₹5,00,000, (₹75,000), ₹7,00,000, ₹1,00,000. Calculate the value of goodwill of the firm using the purchase of last four years' profits method.

CBSE 2026 · Set 67/3/1 · 4 marks

Raman, Daman and Vikram were partners in a firm sharing profits and losses in the ratio of 5 : 4 : 1. On 31st March, 2025, their capitals were ₹6,00,000; ₹3,00,000 and ₹2,00,000 respectively. With effect from 1st April, 2025, they decided to share the future profits equally. Due to change in profit sharing ratio, it was agreed that: (i) Goodwill of the firm will be valued at ₹3,00,000. (ii) Revaluation of assets and liabilities will be carried out. The revaluation of assets and liabilities resulted in a loss of ₹12,000. (iii) Total capital of the reconstituted firm will be ₹12,00,000 and will be in the new profit sharing ratio of the partners. For this purpose, necessary cash will be brought in by the partners or paid off to the partners, as the case may be.

CBSE 2026 · Set 67/3/2 · 1 mark

Chaman, Raman and Suman were partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. With effect from 1st April, 2025, they decided to share the future profits in the ratio of 2 : 3 : 5. For this purpose, it was agreed that the goodwill of the firm be valued at 1,00,000. The treatment of goodwill without opening goodwill account will be:

  • Chaman's Capital A/c debited by 30,000
  • Chaman's Capital A/c credited by 30,000
  • Suman's Capital A/c debited by 15,000 and Raman's Capital A/c credited by 30,000
  • Chaman's and Suman's Capital A/c debited by 15,000 and 30,000 each

CBSE 2026 · Set 67/3/2 · 3 marks

Akash and Mita were partners in a firm sharing profits and losses in the ratio of 5 : 3. Their capitals were 9,00,000 and 6,00,000 respectively. The normal rate of return was 15%. The profits of the last four years were: Year 1: 5,50,000 Year 2: 5,00,000 Year 3: (1,50,000) Year 4: 6,50,000 Year 5: 50,000. Goodwill will be calculated on the basis of average super profits. Calculate the value of goodwill of the firm.

CBSE 2026 · Set 67/3/3 · 3 marks

Rita and Mohit were partners in a firm sharing profits and losses in the ratio of 7 : 3. Their capitals were ₹7,00,000 and ₹3,00,000 respectively. The normal rate of return was 10%. The profits for the last four years were: ₹3,30,000, ₹4,00,000, (₹70,000), ₹5,00,000, ₹40,000. super profits. Calculate the value of goodwill of the firm.

CBSE 2026 · Set 67/4/1 · 1 mark

A business earned an average profit of ₹2,00,000 during the last few years. The value of net assets of the business is ₹17,00,000 and the normal rate of return in a similar business is 10%. The value of goodwill of the business by capitalisation of super-profits method will be:

  • ₹17,00,000
  • ₹2,00,000
  • ₹3,00,000
  • ₹30,000

CBSE 2026 · Set 67/4/1 · 1 mark

Assertion (A): Goodwill is an intangible asset. Reason (R): Goodwill is the value of the reputation of a firm in respect of profits expected in future over and above the normal profits. Choose the correct option from the following:

  • Both Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A).
  • Both Assertion (A) and Reason (R) are correct, but Reason (R) is not the correct explanation of Assertion (A).
  • Assertion (A) is incorrect, but Reason (R) is correct.
  • Assertion (A) is correct, but Reason (R) is incorrect.

CBSE 2026 · Set 67/4/2 · 1 mark

Asha, Manan and Niyati were partners in a firm sharing profits and losses in the ratio of 3 : 2 : 1. With effect from 1st April, 2025, they agreed to share profits and losses equally. Due to change in the profit sharing ratio:

  • Sacrifice
  • Gain
  • Sacrifice
  • Gain

CBSE 2026 · Set 67/4/2 · 3 marks

Chaitanya and Divya were partners in a firm sharing profits and losses in the ratio of 2 : 1. From 1st April 2025, they decided to share future profits and losses in the ratio of 2 : 3. On this date, their balance sheet showed a debit balance of ₹1,80,000 in the Profit and Loss Account and a balance of ₹90,000 in General Reserve. The partners decided to distribute the General Reserve, but decided not to disturb the Profit and Loss Account, which will continue in the books of the reconstituted firm. Pass necessary journal entries for the above transactions on the reconstitution of the firm. Show your workings clearly.

CBSE 2026 · Set 67/5/1 · 1 mark

Mansi and Uma were partners in a firm and their capitals were ₹4,00,000 and ₹2,00,000 respectively. Normal rate of return in a similar business was 15% and the goodwill of the firm was valued at ₹4,00,000. If goodwill was calculated at four years purchase of super profits, the average profits of the firm were:

  • ₹90,000
  • ₹60,000
  • ₹1,00,000
  • ₹1,90,000

See all 246 board PYQs for this chapter — open PYQ tab →

Class 12 Accountancy Formula Sheet

Every formula, ratio and format from all 10 chapters on one page, checked against the NCERT textbook and the CBSE 2026-27 syllabus. Free PDF download.

View the formula sheet →

Class 12 Accountancy Previous Year Questions, Chapter-wise

All 1230 CBSE board questions from 2022–2026, sorted by chapter and question type. Free PDF download.

See all past board questions →

Next chapterReconstitution of a Partnership Firm – Retirement/Death of a Partner →
Found this useful? Share it with your class group.

You've seen the free preview. Open the full interactive study kit — mind map, instant-graded quiz, progress tracking — free, no sign-in required.

Open Full Study Kit — Free →

Premium unlocks the full Question Bank, Daily Practice Papers, Chapter Quiz and Full Mock Papers for every chapter.